Oil sands operators bet on local advantage as U.S. partners flee

By Kevin Orland on 4/20/2017

CALGARY (Bloomberg) -- Now that multi-national energy producers have sold their stakes in Canada’s oil sands, local companies are hatching plans to make some real changes.

Cenovus Energy Inc. and Canadian Natural Resources are betting they can exploit new technologies and their deeper understanding of Canadian-specific issues, such as environmental rules and relations with native communities, to profit from one of the world’s biggest hydrocarbon reserves without their former partners.

“The oil sands require a focus on environmental issues like carbon pricing, indigenous issues, things like that, that are very specific kinds of skills that companies need to have for Alberta, for Canada,” said Harrie Vredenburg, a professor at the University of Calgary’s Haskayne School of Business. “Some of the multinationals are not necessarily particularly suited to that. In all those things, it does favor the Canadian firms.”

Investors have reservations. Cenovus shares dropped 14% on March 30, the day after it agreed to buy ConocoPhillips’s stake in its oil-sands project, and some conventional assets, for $13.3 billion. While Canadian Natural’s shares gained, its bonds tumbled on March 9 after it struck a $9.42-billion deal with Royal Dutch Shell and Marathon Oil. So far this year, non-Canadian companies have shed more than $20 billion in oil-sands assets.

Ironic Angst

The angst over the multinationals’ departure is ironic given that, in the first decade of the century, the concern was that non-Canadian firms were snapping up too much, Vredenburg said. Back then, oil prices were climbing toward $140/bbl, talk of peak oil was rampant and producers were scrambling to find new reserves.

They looked to Canada’s oil sands -- a mixture of sand, water, clay and a tarlike hydrocarbon mix known as bitumen. The deposits rank as the third-largest reserve of crude oil in the world, with 165 billion bbl of recoverable oil, according to the Canadian Association of Petroleum Producers.

The sands had produced oil since the late 1960s, but it was expensive. The sand was dug up in open-pit mines, then trucked to a refining plant where the bitumen was separated out using hot water. But in a world that appeared to be running out of oil, multinationals were willing to bet that the operations would be profitable.

International investments helped the industry build the facilities needed to extract the oil and turn it into a form that could flow through pipelines. Over time, innovations such as steam-assisted gravity drainage, to get the bitumen to flow to the surface, helped lower costs and increase production. The oil sands produced about 2.4 MMbpd in 2015, accounting for almost two-thirds of Canada’s output.

With the price of oil hovering between $50 and $55/bbl this year, producers are searching for added efficiency. Operating costs for a steam drainage project, excluding some items, were about C$7.53/bbl last year, according to a study from the Canadian Energy Research Institute. That’s down 32% from C$11.15 in 2011.

While some of the improvements have come from lower labor costs and may be temporary, companies also have made permanent changes, such as improving their well-pad designs and moving processing units closer to production sites, said Dinara Millington, author of the Canadian Energy Research study. New techniques, like injecting wells with chemicals that dissolve the bitumen so that operations require less steam, could save as much as an additional 40%, she said.

“Not only would these technologies address the emissions and overall environmental footprint, but we also could see significant supply-cost savings,” Millington said in an interview.

The companies have a “remarkable” opportunity to further reduce expenses with a new batch of technologies that may be in use within the next three to five years, said Dan Wicklum, chief executive officer of Canada’s Oil Sands Innovation Alliance.

Radio Frequencies

Steam operations could be improved with machines that put water in direct contact with a flame, rather than by heating it in a vessel. Companies are also looking at replacing steam with microwaves or radio frequencies. The advances could help oil-sands operators cut costs by as much as 40% and reduce greenhouse-gas emissions by as much as 80%, Wicklum said.

The best methods will be widely available. Companies including Canadian Natural Resources, Cenovus and Suncor Energy have agreed to share proprietary technologies royalty-free, a unique setup that may not have been possible without Canadian friendliness, Wicklum said.

“Canadians will always try to negotiate and to find common ground and collaborate before we become confrontational and adversarial,” he said.

Automation and data-analytics techniques used in other industries could help, too, according to Cenovus Chief Executive Officer Brian Ferguson. The oil-sands industry is only “just starting to scratch the surface” with those technologies, he told reporters in Toronto last week.

“We will now get the full benefit of all the continuing cost improvements and innovations in the oil sands,” Ferguson said.

Challenges Remain

Yet the oil sands still face challenges. They remain one of the costliest and least efficient ways of producing oil, making them a target of environmentalists. Canadian Prime Minister Justin Trudeau said earlier this year that the oil sands eventually will be phased out as part of a transition away from fossil fuels. And Alberta recently implemented a carbon tax and a limit on total emissions from the oil sands.

Canadian Natural Resources President Steve Laut said that while Canada’s strict rules might deter international investors who can put their money in places with more lenient regulations, like Brazil, Saudi Arabia or the U.S.’s Permian Basin, Canada’s higher standards are a strength. Canadian Natural and its counterparts will do what it takes to make their businesses successful in their home country, he told reporters in Toronto last week. “That’s the big difference. We’re committed,” Laut said. “We’re going to make it happen."